Morgan Stanley Funds (UK)

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Morgan Stanley

Funds (UK)

Annual Report

30 September 2015

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2 Morgan Stanley Funds (UK) (the “Company”)

3 Directory

4 Report of the Authorised Corporate Director of Morgan Stanley Funds (UK) (the “Company”)

5 Report of the Depositary to the Shareholders of the Company

6 Independent Auditors’ Report to the Shareholders of the Company

FUND REVIEWS & FINANCIAL STATEMENTS Equity Funds

7 Global Brands Fund

Fixed Interest Fund

19 Sterling Corporate Bond Fund

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The Company is an investment company with variable capital (“ICVC”), also known as Open Ended Investment Company (“OEIC”). The Company is incorporated in England and Wales, and is authorised by the Financial Conduct Authority (“FCA”). The company is an Undertakings for Collective Investment in transferable Securities (“UCITS”) Scheme and is structured as an umbrella company with two sub-funds (“Funds”), each with a different investment objective.

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REGISTERED OFFICE 25 Cabot Square Canary Wharf London E14 4QA United Kingdom

AUTHORISED CORPORATE DIRECTOR

Morgan Stanley Investment Management (ACD) Limited

25 Cabot Square Canary Wharf London E14 4QA United Kingdom

Authorised and regulated by The FCA

REGISTRAR

International Financial Data Services Limited

PO Box 9025 Chelmsford CM99 2WE United Kingdom

INVESTMENT MANAGER

Morgan Stanley Investment Management Limited

25 Cabot Square Canary Wharf London E14 4QA United Kingdom

ADMINISTRATOR

State Street Bank and Trust Company

20 Churchill Place London

E14 5HJ United Kingdom

DEPOSITARY

State Street Trustees Limited

525 Ferry Road Edinburgh EH5 2AW United Kingdom

INDEPENDENT AUDITORS

Ernst & Young LLP

Ten George Street Edinburgh EH2 2DZ United Kingdom

LEGAL ADVISERS

Eversheds LLP

One Wood Street London EC2V 7WS United Kingdom

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The Authorised Corporate Director (“ACD”) of the Company is Morgan Stanley Investment Management (ACD) Limited. The ACD is the sole director of the Company. The Depositary is State Street Trustees Limited and the Independent Auditors are Ernst & Young LLP. The Company is an authorised open-ended investment company with variable capital under Regulation 12 (Authorisation) of the OEIC regulations and the shareholders are not liable for the debts of the Company. The Company is structured as an umbrella company with each underlying Fund having the investment powers equivalent to those of a securities company. In the future, there may be other Funds within the Company.

The assets of each Fund belong exclusively to that Fund and are not available to discharge (directly or indirectly) the liability of, or claims against any other fund.

The investment objective of each Fund, the Company’s policy for pursuing that objective and a review of each Fund’s investment activities for the year are set out in the individual fund reviews contained in this Annual Report and Financial Statements.

CROSSHOLDINGS

There were no shares in any Fund held by other Funds of the ICVC.

IMPORTANT EVENTS DURING THE PERIOD

The Investment Management Association (IMA) has published in accordance with FRS 102 a revised Statement of Recommended Practice (SORP) in May 2014 which supersedes the previous SORP for the preparation of Financial Statements by UK Authorised Funds. The IMA changed its name to Investment Association (IA) effective January 2015.

The recommendations of this SORP are applicable to accounting periods beginning on or after 1 January 2015 or for early adoption of the 2014 SORP. The ACD has opted to early adopt the SORP and as a result the requirement for Umbrella Funds to present

aggregated accounts has been removed from the Financial Statements of the Company.

STATEMENT OF AUTHORISED CORPORATE DIRECTOR’S RESPONSIBILITIES

These annual financial statements have been prepared by the ACD in accordance with the Statement of Recommended Practice for Authorised Funds issued by the Investment Management Association (now Investment Association – IA) in May 2014 and the rules contained in the Financial Conduct Authority’s Collective Investment Scheme Sourcebook (together the “Regulations”) and give a true and fair view of the net revenue and gains/(losses) of the scheme property of each Fund and the financial position of each Fund at the end of the accounting year.

The ACD is responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Company and enables the ACD to ensure that the financial statements comply with the Regulations. In preparing this annual report, the Authorised Corporate Director has:

• prepared the financial statements on a going concern basis; • selected suitable accounting policies and applied them consistently; • made judgements and estimates that are reasonable and prudent; • followed applicable accounting standards; and

• prepared financial statements in accordance with the Statement of Recommended Practice for Authorised Funds issued by the IA in May 2014.

The ACD confirms that they have complied with the above requirements in preparing the financial statements. The ACD is responsible for the management of the Company in accordance with the Company’s Instrument of Incorporation, Prospectus and the Regulations. The ACD is responsible for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Ruairi O’Healai Director on behalf of Morgan Stanley Investment Management (ACD) Limited as Authorised Corporate Director of Morgan Stanley Funds (UK) 19 November 2015

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The Depositary is responsible for the safekeeping of all the property of the Company (other than tangible moveable property) which is entrusted to it. It is the duty of the Depositary to take reasonable care to ensure that the Company is managed in accordance with the rules set out in the Financial Conduct Authority’s Collective Investment Schemes Sourcebook (“COLL”), the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228) (the ’’OEIC Regulations’’), and the Company’s Instrument of Incorporation, in relation to: the pricing of, and dealings in, shares in the Company; the application of revenue of the Company; and the investment and borrowing powers of the Company.

Having carried out such procedures as we consider necessary to discharge our responsibilities as Depositary of the Company, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the Company, acting through the Authorised Corporate Director:

• has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Company’s shares and the application of the Company’s revenue in accordance with the COLL and, where applicable, the OEIC Regulations and the Instrument of Incorporation of the Company; and

• has observed the investment and borrowing powers and restrictions applicable to the Company.

STATE STREET TRUSTEES LIMITED Edinburgh 19 November 2015

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We have audited the financial statements of Morgan Stanley Funds (UK) ("the Company") for the year ended 30 September 2015 which comprise the Statement of Total Return, the Statement of Change in Net Assets Attributable to Shareholders, Balance Sheet, the related notes 1 to 18 and Distribution Tables for each Fund. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice); specifically FRS 102, the Financial Reporting Standard applicable to the UK and Ireland.

This report is made solely to the Company’s members, as a body, pursuant to Paragraph 4.5.12 of the rules of the Collective Investment Schemes Sourcebook of the Financial Conduct Authority. Our audit work has been undertaken so that we might state to the

shareholders those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the shareholders as a body, for our audit work, for this report or for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF THE AUTHORISED CORPORATE DIRECTOR (ACD) AND AUDITOR

As explained more fully in the ACD’s responsibilities statement set out on page 4, the ACD is responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the ACD; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

OPINION ON FINANCIAL STATEMENTS

In our opinion the financial statements:

• give a true and fair view of the financial position of the Company as at 30 September 2015 and of the net revenue and the net gains/(losses) on the scheme property of the Company and its Funds for the year ended; and

• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice.

OPINION ON OTHER MATTERS PRESCRIBED BY THE RULES OF THE COLLECTIVE INVESTMENT SCHEMES SOURCEBOOK OF THE FINANCIAL CONDUCT AUTHORITY

In our opinion:

• the financial statements have been properly prepared in accordance with the Statement of Recommended Practice relating to Authorised Funds, the rules of the Collective Investment Schemes Sourcebook of the Financial Conduct Authority and the Instrument of Incorporation;

• the information given in the ACD’s report for the financial year for which the financial statements are prepared is consistent with the financial statements;

• there is nothing to indicate that proper accounting records have not been kept or that the financial statements are not in agreement with those records; and

• we have received all the information and explanations which, to the best of our knowledge and belief, are necessary for the purposes of our audit.

Ernst & Young LLP

Statutory Auditor Edinburgh 19 November 2015

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Fund Review

INVESTMENT OBJECTIVE

The objective of the Fund is to provide long term capital appreciation through investment primarily in equity securities issued worldwide.

RISK AND REWARD PROFILE

Lower risk Higher risk

Potentially lower rewards Potentially higher rewards

The risk and reward category shown is based on historic data. • Historic figures are only a guide and may not be a reliable

indicator of what may happen in the future. • As such this category may change in the future.

• The higher the category, the greater the potential reward, but also the greater the risk of losing the investment. Category 1 does not indicate a risk free investment.

• The Fund is in this category because it invests in company shares, and the Fund’s simulated and/or realised return has experienced high rises and falls historically.

This rating does not take into account other risk factors which should be considered before investing, these include:

• Your investment can go down as well as up. You may not get back the amount you have invested.

• The Fund may be impacted by movements in the exchange rates between the Fund’s currency and the currencies of the Fund’s investments.

PERFORMANCE RECORD AS AT 30 SEPTEMBER 2015

Share Class A Accumulation 30 Sep 30 Sep 30 Sep

2015 2014 2013 Change in net assets per share (iii) (£) (£) (£)

Opening net asset value per share 43.62 40.22 35.80 Return before operating charges 3.85 4.13 5.10

Operating charges (0.82) (0.73) (0.68)

Return after operating charges 3.03 3.40 4.42

Distributions on income units – – –

Closing net asset value per share 46.65 43.62 40.22

Retained distributions on accumulation shares (0.27) (0.39) (0.39) After direct transaction costs of: (0.04) (0.03) (0.05)

Performance (i)

Return after operating charges 6.93% 8.47% 12.34%

Other information

Closing net asset value 4,614,124 7,241,210 12,147,326 Closing number of shares 98,916 165,989 302,035

Operating Charges (ii) 1.75% 1.75% 1.75%

Direct transaction costs 0.09% 0.07% 0.13%

Prices

Highest share price 50.18 46.86 43.75

Lowest share price 44.61 39.03 35.80

Share Class A Income 30 Sep 30 Sep 30 Sep

Distributions on income units (0.08) (0.11) (0.13)

Retained distributions on accumulation shares – – – After direct transaction costs of: (0.01) (0.01) (0.02)

Performance (i)

Closing net asset value 104,242 343,930 925,750 Closing number of shares 7,369 25,847 74,823

Prices

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Fund Review (continued)

Share Class I Accumulation 30 Sep 30 Sep 30 Sep

Retained distributions on accumulation shares (0.69) (0.77) (0.75) After direct transaction costs of: (0.04) (0.03) (0.05)

Performance (i)

Closing net asset value 479,643,936 455,548,389 477,925,918 Closing number of shares 9,357,667 9,574,923 10,977,864

Prices

Share Class I Income 30 Sep 30 Sep 30 Sep

Retained distributions on accumulation shares – – – After direct transaction costs of: (0.01) (0.01) (0.02)

Performance (i)

Closing net asset value 106,163,367 123,789,122 101,387,869 Closing number of shares 7,066,904 8,759,240 7,709,447

Prices

(i) The performance has been calculated in accordance with the Statement of Recommended Practices’ prescribed calculation methodology. This is for financial statement reporting purposes only and may differ from the Fund’s performance disclosed on the Key Investors document or the Fund’s prospectus. Past performance is no guarantee of future returns. In particular, any returns illustrated here will not necessarily continue at the levels shown.

(ii) Operating charges show the annual expenses of the Fund as a percentage of the average net asset value.

(iii) Valued at bid basis.

PERFORMANCE REVIEW

For the 12-month period ending 30 September 2015, the Fund’s I Accumulation class shares outperformed the benchmark, MSCI World (Net) Index by 6.15%, returning 7.73% (i) (net of fees in sterling) versus 1.58% for the Index.

The portfolio continued to deliver strong returns over the period. The outperformance was primarily due to our overweight allocation to Consumer Staples (companies whose businesses are less sensitive to economic cycles), although this was partly offset by stock selection in the sector. Our structural bias to higher quality stocks in higher quality sectors has worked well. The portfolio’s zero exposure to Energy and Materials (given the inability of companies in these sectors to control pricing) has contributed positively to performance. Stock selection and allocation to higher quality Information Technology names with recognisable brands and recurring revenues, as well as high quality Industrials, also contributed positively to performance. Stock selection in and allocation to Health Care and stock selection in Consumer Discretionary (businesses that tend to be more sensitive to economic cycles) detracted from performance during the period under review.

MARKET REVIEW

The MSCI World Index advanced just 1.58% in sterling terms for the period. The prices of industrial metals and oil have weakened considerably over the year. Continuing U.S. dollar strength and emerging market currency weakness set the scene for

disappointing earnings results in the first quarter. The market was preoccupied with the possibility of a Greek default and exit from the Eurozone in the second quarter of 2015. China slowdown fears, and its impact on global growth, took hold. This was particularly true in the third quarter of 2015, with the month of August being characterised by severe intra-month volatility in the stock, commodity, foreign exchange and bond markets. The Federal Reserve’s next step on interest rates remains in question and continues to drive market uncertainty.

PORTFOLIO ACTIVITY

During the period we bought stocks in some Consumer Discretionary (particularly Media), Information Technology (Services) and Consumer Staples (Tobacco, Food and Beverage) companies and sold our holdings in some Consumer Staples (Tobacco, Food and Beverage) and Consumer Discretionary (Luxury Goods) companies. Moreover, we both added to and reduced our positions in select Consumer Staples (Tobacco, Food and Beverage and Personal Health), Consumer Discretionary (Media), Financials (Non-Banking Financial) and Information Technology (Software and Services) companies on relative valuation grounds. For example, in one case during the period, we added to our holdings in one Tobacco company and reduced our holdings in a different Tobacco company.

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Fund Review (continued)

The environment for Consumer Staples, a key sector for the Fund, has become more complex and competitive in recent years with the advent of social media, e-commerce, FX volatility and changing consumer trends. Increasingly we find ourselves preferring Consumer Staples companies that are decentralised in their management and therefore more agile in a local context. Our portfolio activity reflects that. Within Consumer

Discretionary, the performance of U.S. Media suffered particularly in August as the market derated the sector due to fears of accelerated cord-cutting (subscribers cutting cable subscriptions). We believe the market overreacted and used the opportunity to add to high quality U.S. Media names with quality branded content and pricing power.

STRATEGY & OUTLOOK

Market confidence is waning on growth, profits and policy maker effectiveness. Market tremors in August have removed only some of the froth in equities, which remain optimistically priced. However, we believe that valuations of the subset of high quality equities in which we typically invest are not particularly expensive, with next twelve month free cash flow yields equal to that of the market for a significantly superior profile in terms of returns, gross margins and robustness of the balance sheet.

In our experience, severe market corrections have historically seen indiscriminate selling at first, regardless of valuation or quality of the stocks sold. But then the market does begin to distinguish quality from the rest. We generally aim to own companies with characteristics that set us apart from the broader market: more resilient sales, better than average margins, lower capital expenditure requirements and strong balance sheets. Moreover, the portfolio’s return on capital and its ability to generate free cash flow remains well above the market average, while volatility of returns is below average. Dividend pay-out ratios also seem reasonable.

We continue to focus on reasonably priced, high quality, high return, growing companies that can, owing to their resilient economics and compounding, support capital appreciation and help ride out the event of multiple-compression and likely provide strong relative capital preservation in significant market setbacks.

All information is provided for informational purposes only and should not be deemed as a recommendation to purchase or sell the securities mentioned.

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Portfolio Statement

AS AT 30 SEPTEMBER 2015

Market % of net % of net Value asset value asset value Holdings Investments (£) 30 Sep 2015 30 Sep 2014

France – 6.40% 221,875 Pernod Ricard 14,812,102 2.51 172,892 Publicis 7,721,071 1.31 241,159 Sanofi 15,236,402 2.58 37,769,575 6.40 11.97 Germany – 1.83% 251,324 SAP 10,828,697 1.83 4.01 Ireland – 6.63% 442,705 Accenture 28,131,092 4.76 1,040,990 Experian 11,013,674 1.87 39,144,766 6.63 6.39 Italy – 0.81% 908,778 Davide Campari-Milano 4,794,767 0.81 0.93 Japan – 2.12% 620,412 Japan Tobacco 12,492,920 2.12 0.83 Netherlands – 0.57% 311,840 RELX NV 3,355,004 0.57 0.00 Sweden – 0.00% – – 0.23 Switzerland – 9.66% 1,155,053 Nestlé 57,040,421 9.66 8.93 United Kingdom – 23.97%

1,474,548 British American Tobacco 53,474,483 9.06

743,205 Reckitt Benckiser 44,495,683 7.53 286,016 RELX 3,206,239 0.54 1,502,717 Unilever 40,408,060 6.84 141,584,465 23.97 30.34 United States – 45.34% 114,134 3M 10,625,673 1.80 793,746 Altria 28,310,396 4.80 207,138 ADP 10,778,699 1.83 118,249 Intuit 6,755,419 1.14

51,018 Mead Johnson Nutrition 2,337,248 0.40

1,385,213 Microsoft 39,572,308 6.70

987,310 Mondelez International 26,509,718 4.49

94,373 Moody’s 6,054,550 1.03

173,183 NIKE 13,632,221 2.31

377,157 Philip Morris International 19,514,194 3.30

276,477 Procter & Gamble 13,146,255 2.23

542,007 Time Warner 23,739,327 4.02

509,062 Twenty-First Century Fox ’A’ Shares 8,641,226 1.46 826,879 Twenty-First Century Fox ’B’ Shares 14,074,192 2.38

520,573 Visa 23,465,000 3.97

314,395 Walt Disney 20,563,200 3.48

267,719,626 45.34 34.47 Portfolio of investments 574,730,241 97.33 98.10 Net other assets 15,795,428 2.67 1.90 Net assets 590,525,669 100.00 100.00

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Statement of Total Return

FOR THE YEAR ENDED 30 SEPTEMBER 2015

Notes 30 Sep 15 (£) 30 Sep 15 (£) 30 Sep 14 (£) 30 Sep 14 (£) Income

Net capital gains 4 37,950,986 42,241,518

Revenue 5 15,937,883 16,139,142

Expenses 6 (6,360,472) (5,841,248)

Interest payable and similar charges 8 (772) (62)

Net revenue before taxation 9,576,639 10,297,832

Taxation 7 (993,782) (580,375)

Net revenue after taxation 8,582,857 9,717,457

Total return before distributions 46,533,843 51,958,975

Distributions 8 (8,582,943) (9,717,471)

Change in net assets attributable to shareholders

from investment activities 37,950,900 42,241,504

Statement of Change in Net Assets Attributable to Shareholders

30 Sep 15 (£) 30 Sep 15 (£) 30 Sep 14 (£) 30 Sep 14 (£) Opening net assets attributable to shareholders 586,922,651 592,386,863

Amounts received on issue of shares 110,373,359 48,495,865

Amounts paid on cancellation of shares (151,486,064) (103,852,956)

(41,112,705) (55,357,091)

Dilution adjustments 122,711 –

Change in net assets attributable to shareholders

from investment activities 37,950,900 42,241,504

Retained distribution on accumulation shares 6,642,112 7,651,375

Closing net assets attributable to shareholders 590,525,669 586,922,651

Balance Sheet

Notes 30 Sep 15 (£) 30 Sep 15 (£) 30 Sep 14 (£) 30 Sep 14 (£) Assets

Investment assets 574,730,241 575,757,577

Debtors 9 4,030,594 2,627,422

Cash and bank balances 10 15,399,187 12,441,123

Total other assets 19,429,781 15,068,545

Total assets 594,160,022 590,826,122

Liabilities

Creditors 11 2,637,498 2,612,912

Distribution payable on income shares 996,855 1,290,559

Total liabilities 3,634,353 3,903,471

Net assets attributable to shareholders 590,525,669 586,922,651

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Notes to the Financial Statements

FOR THE YEAR ENDED 30 SEPTEMBER 2015 1. ACCOUNTING POLICIES

a) Basis of accounting

The financial statements have been prepared under the historical cost basis, as modified by the revaluation of investments, and in accordance with the Statement of Recommended Practice for Authorised Funds (the “SORP”) issued by the Investment Management Association (the “IMA”) (now known as the Investment Association) in May 2014. FRS102 the Financial Reporting Standard applicable in the UK has been early adopted to coincide with the permitted early application of the IMA SORP.

b) Revenue

Dividends on equities and preference stock are recognised when the securities are quoted ex-dividend. Interest receivable from bank deposits is accounted for on an accruals basis. Special dividends are treated as either capital or revenue depending on the facts of each particular case.

Amounts recognised as revenue will form part of the Company’s distribution. Any tax treatment thereon will follow the accounting treatment of the principal amount.

c) Expenses

All expenses, reimbursements and fee waivers are recognised on an accrual basis. Expenses other than those relating to the purchase and sale of investments, are charged against revenue in the Statement of Total Return.

The ACD has chosen to waive part or all of its fee and/or cover other expenses of the Fund in order to reduce the impact that such fees may have on the performance of the Fund. This waiver or reimbursement is entirely voluntary and may be discontinued at any time without notice at the sole discretion of the ACD. The amount of fees waived during the period is shown in note 6.

d) Taxation

The charge for taxation is based on the net revenue for the year. UK dividend revenue is disclosed net of any related tax credit. Overseas dividends are disclosed gross of any foreign tax suffered, the tax element being separately disclosed in the taxation note. Deferred taxation is provided on all timing differences that have originated and not reversed by the Balance Sheet date, other than those differences regarded as permanent. Any liability to deferred tax is provided at the rate at which it is anticipated the timing difference will reverse. Deferred tax assets and liabilities are not discounted to reflect the time value of money, a deferred tax asset is only recognised to the extent that it is expected to crystallise.

e) Valuation of investments

Market value is defined by the SORP as fair value, which generally is the bid value of each security. To comply with this,

quoted investments have been valued at bid-market value at 12:00pm on the last business day of the year.

Unquoted, illiquid and suspended investments are valued by the ACD at a best assessment of fair value.

f) Exchange rates

Assets and liabilities denominated in foreign currencies are translated into Sterling at the exchange rate prevailing at 12.00pm on the last business day of the accounting period, 30 September 2015. Revenue and expenditure transactions are translated at the rates of exchange ruling on the dates of the transactions. Gains or losses arising on the translation are reported on as part of the return for the year.

2. DISTRIBUTION POLICY

The revenue from the Fund’s investments accumulates during each accounting period. If revenue exceeds expenses during the period, the net revenue of the Fund is available for distribution at share class level to the shareholders in accordance with the regulations. The allocation of revenue and non class specific expenses is based upon the proportion of the Fund’s assets attributable to each share class, on the day the revenue is earned or expense is suffered. Income equalisation and the annual management charge, are specific to each share class.

The ordinary element of stock dividends, received in lieu of cash dividends, is treated as revenue, and forms part of the distribution. In the case of an enhanced stock dividend, the value of the enhancement is treated as capital and does not form part of the distribution.

3. FINANCIAL RISK MANAGEMENT POLICIES

Strategy in using financial instruments

In pursuing its investment objective, the Fund hold a number of financial instruments. The Fund’s financial Instruments comprise securities and other investments, cash balances, debtors and creditors that arise directly from its operations, for example, in respect of sales and purchases awaiting settlement, amounts receivable for issue of shares and payables for cancellation of shares and debtors for accrued revenue.

Financial derivative instruments may be used by the Fund for efficient portfolio management, for example to hedge investment exposure or to adjust exposure in a cost effective manner. Derivative instruments held within the Fund will be accounted for in accordance with the SORP for Authorised Funds. Derivative transactions will be treated as either revenue or capital depending on the motives and circumstances on acquisition. Derivatives are not used to gear (leverage) the portfolio. Gearing a portfolio would occur if the levels of exposure to the markets exceed the underlying value of the Fund.

The main risks the Fund face from investing are: (a) market price risk, (b) foreign currency risk, (c) interest rate risk & cash flow risk and (d) liquidity risk.

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Notes to the Financial Statements

(continued)

These risks and the ACD’s policies for managing them are summarised below and have been applied to the Fund throughout the year and the prior year.

(a) Market price risk

The Fund’s investment portfolios are exposed to market price fluctuations caused by factors other than interest rate or currency movement.

Price risk arises from investments held by the Fund for which prices in the future are uncertain. Where non-monetary financial instruments are denominated in currencies other than the British Pounds, the price in the future will also fluctuate because of changes in foreign exchange rates which are considered a component of price risk.

All security investments present a risk of loss of capital arising from uncertainties about future prices of the instruments. The

Investment Manager manages this risk through a careful selection of securities and other financial instruments, management of exposure to geographical regions, adherence to investment guidelines, and to investment and borrowing powers set out in the Prospectus.

(b) Foreign currency risk and currency exposure

Some of the Fund’s monetary and non-monetary financial assets and liabilities are denominated in currencies other than the base currency of that fund. As a result, movements in exchange rates affect the Sterling value of the portfolio, cash and investment purchases and sales. The foreign exchange risk relating to non-monetary assets and liabilities is a component of price risk. Foreign exchange risk arises as the value of monetary assets and liabilities denominated in other currencies will fluctuate due to changes in exchange rates.

The Fund may enter into derivative transactions in the form of forward foreign exchange contracts. Forward foreign exchange contracts are used to manage currency risk arising from holdings of overseas securities by the Fund.

The Fund’s currency exposure as at 30 September 2015 was:

Net foreign currency assets Non-Monetary Monetary

Exposure Exposure Total

Currency £ £ £ Euro 464,518 56,748,044 57,212,562 Japanese Yen (2,057,207) 12,492,920 10,435,713 Swiss Franc 724,394 57,040,421 57,764,815 US Dollar 1,406,511 295,850,715 297,257,226 Total 538,216 422,132,100 422,670,316

The Fund’s currency exposure as at 30 September 2014 was:

Net foreign currency assets Non-Monetary Monetary

Exposure Exposure Total

Currency £ £ £ Euro 2,149,678 99,257,514 101,407,192 Japanese Yen 61,718 4,897,236 4,958,954 Swedish Krona 228,963 1,336,465 1,565,428 Swiss Franc 936,544 52,390,589 53,327,133 US Dollar 3,812,833 229,444,448 233,257,281 Total 7,189,736 387,326,252 394,515,988

(c) Interest rate risk and cash flow risk

The Fund does not hold fixed income securities therefore interest rate risk is not considered as a material risk.

However, interest receivable on bank deposits or payable on bank overdraft positions will be affected by fluctuations in interest rates. Cash balances are actively managed to ensure that there is enough liquidity in the Fund to cover any expenses or liabilities, while ensuring that no excess cash sits in the Fund. Any cash is placed on overnight/weekly deposit with the custodian and will be subject to current interest rates.

The Fund’s net cash holdings are held in several floating rate deposit accounts with interest determined by rates supplied by the Depositary.

Non-interest Cashflows (i.e. dividend income) may fluctuate depending on the particular decisions made by each issuer. The interest rate risk profile of the Fund’s financial assets and liabilities at 30 September 2015 was:

Floating Financial Rate assets financial not carrying

assets interest Total

Currency £ £ £ 2015 Euro – 57,212,561 57,212,561 Japanese Yen – 12,492,920 12,492,920 Pound Sterling 14,751,517 154,680,982 169,432,499 Swiss Franc – 57,764,815 57,764,815 US Dollar 647,670 296,609,557 297,257,227 Total 15,399,187 578,760,835 594,160,022 2014 Euro 1,617,061 99,790,131 101,407,192 Japanese Yen – 4,958,954 4,958,954 Pound Sterling 7,175,164 189,134,930 196,310,094 Swedish Krona 228,963 1,336,465 1,565,428 Swiss Franc – 53,327,133 53,327,133 US Dollar 3,419,935 229,837,386 233,257,321 Total 12,441,123 578,384,999 590,826,122

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Notes to the Financial Statements

(continued)

Floating Financial Rate liabilities financial not carrying

liabilities interest Total

Currency £ £ £ 2015 Pound Sterling – 1,577,146 1,577,146 US Dollar – 2,057,207 2,057,207 Total – 3,634,353 3,634,353 2014 Pound Sterling – 3,903,431 3,903,431 US Dollar – 40 40 Total – 3,903,471 3,903,471

The Fund’s net cash holdings are held in floating rate deposit accounts with interest determined by rates supplied, based on LIBOR or its International equivalent.

(d) Liquidity risk

The Fund is exposed to daily cash redemptions of redeemable units. The Fund may therefore only invest in securities that are transferable, liquid and have a value that can be accurately determined on each valuation day.

Some securities purchased may subsequently be deemed to be illiquid or have stale prices. If such instances arise, which are infrequent, the securities are reviewed by the Investment Manager on a regular basis and fair valued as appropriate.

All of the Fund’s financial assets as at 30 September 2015 are considered to be readily realisable in accordance with the market practices of the exchange on which they are traded.

In general, cash is managed to ensure the Fund can meet its liabilities. Where investments cannot be realised in time to meet any potential liability, the Fund may borrow up to 10% of its value to ensure settlement.

All of the Fund’s financial liabilities are payable on demand or in less than one year.

The IM’s liquidity risk management policy is aimed at ensuring consistency with the Fund’s underlying obligations and its redemption policy so that the Fund will be in a position to satisfy Shareholders’ redemption requests in accordance with the provisions of the Prospectus. The IM will measure and monitor the liquidity of the Fund’s assets and will provide reports to the ACD on a periodic basis.

If a Shareholder requests the redemption or cancellation of Shares representing a value which the ACD considers to be substantial in relation to the total value of the relevant Fund, the ACD may arrange that the fund cancel the Shares and transfer Scheme Property to the Shareholders in lieu of payment of the price for the Shares in cash.

(e) Use of Derivatives and other Investment Techniques

The Fund may employ techniques and instruments relating to Transferable Securities and other financial liquid assets for efficient portfolio management (i.e. to increase or decrease its exposure to changing security prices, interest rates, currency exchange rates or other factors that affect security values) and hedging purposes. These techniques may include the use of forward currency exchange, futures and other investment techniques. Participation in derivatives transactions involves investment risks and transactions costs to which the Fund would not be subject in the absence of the use of these strategies. These techniques may increase the volatility of a Fund and may involve a small investment of cash relative to the magnitude of the risk assumed. In addition, these techniques could result in a loss if the counterparty of the transaction does not perform as promised. There can be no assurance that the Investment Manager will be able to successfully hedge the Fund.

4. NET CAPITAL GAINS

30 Sep 15 30 Sep 14 (£) (£)

Gains on non-derivative securities 37,718,314 42,287,338

Currency gains/(losses) 248,704 (26,587)

Transaction charges (16,398) (20,002)

ACD’s reimbursement to capital 366 769

Net capital gains 37,950,986 42,241,518

5. REVENUE 30 Sep 15 30 Sep 14 (£) (£) Overseas dividends 10,228,312 9,253,067 UK dividends 5,690,777 6,855,549 Bank interest 18,794 30,526 Total revenue 15,937,883 16,139,142

(16)

Notes to the Financial Statements

(continued)

FOR THE YEAR ENDED 30 SEPTEMBER 2015 6. EXPENSES

30 Sep 15 30 Sep 14 (£) (£) Payable to the ACD, associates of the

ACD and agents of either of them:

Management charge 4,791,439 4,409,686

Administration charge 1,581,171 1,445,601

6,372,610 5,855,287 Payable to the Depositary, associates of the

Depositary and agents of either of them:

Depositary’s fees 102,524 93,718

Safe custody fees 79,532 70,273

182,056 163,991 Other expenses:

Financial Conduct Authority fee 486 482

Audit fee* 9,450 9,450

Professional fees 17,130 18,465

Printing & production costs 18,487 15,345

45,553 43,742 Expenses 6,600,219 6,063,020

Less ACD reimbursement to revenue (239,747) (221,772)

Total expenses 6,360,472 5,841,248

* The audit fee for the year, excluding VAT, was £7,875 (2014: £7,875).

7. TAXATION

(a) Analysis of charge in the year:

30 Sep 15 30 Sep 14 (£) (£)

Overseas tax 993,782 580,375

Total current tax for the year 993,782 580,375

(b) Factors affecting current tax charge for the year:

The tax assessed for the year is lower than the standard rate of corporation tax in the UK for an open ended investment company (20%).

The differences are explained below:

30 Sep 15 30 Sep 14 (£) (£)

Net revenue before taxation 9,576,639 10,297,832

Corporation tax at 20% (2014: 20%) 1,915,328 2,059,566

Effects of:

Revenue not subject to corporation tax (3,183,818) (3,221,723) Movement in excess expenses 1,268,417 1,162,157

Overseas tax 993,782 580,375

Rebated capital expense 73 –

Total current tax for the year 993,782 580,375

(c) Provision for deferred tax

At 30 September 2015 the fund had surplus management expenses of £26,657,001 (30 September 2014 £20,314,918). It is unlikely that the Fund will generate sufficient taxable profits in the future to utilise these expenses and therefore a deferred tax asset of £5,331,401 (2014: £4,062,984) has not been recognised.

8. DISTRIBUTIONS

The distributions take account of equalisation received on the issue of shares and amounts deducted on the cancellation of shares, and comprise:

30 Sep 15 30 Sep 14 (£) (£)

Interim 2,747,305 3,584,101

Final 5,486,439 6,031,472

Add: Amounts deducted on cancellation of shares 546,692 297,228 Less: Amounts received on issue of shares (197,493) (195,330)

Net distribution for the year 8,582,943 9,717,471

Distributions are represented by:

30 Sep 15 30 Sep 14 (£) (£)

Net revenue after taxation 8,582,857 9,717,457

Movement on revenue account 86 14

Net distribution for the year 8,582,943 9,717,471

Details of the distribution per share are set out in the Distribution Tables on page 18.

9. DEBTORS

30 Sep 15 30 Sep 14 (£) (£)

Accrued revenue 818,817 1,014,112

Amounts receivable for issue of shares 1,437,271 191,327

Sales awaiting settlement 551,319 –

Overseas tax recoverable 1,188,910 1,393,671 Reimbursement of expenses receivable from ACD 34,277 26,990

Prepaid expenses – 1,322

4,030,594 2,627,422

10. CASH AND BANK BALANCES

30 Sep 15 30 Sep 14 (£) (£)

Cash and bank balances 15,399,187 12,441,123

15,399,187 12,441,123

11. CREDITORS

30 Sep 15 30 Sep 14 (£) (£)

Purchases awaiting settlement 2,057,207 –

Accrued expenses 162,196 173,702

Amounts payable to ACD 363,680 372,387

Amount payable for cancellation of shares 54,415 2,066,823

(17)

Notes to the Financial Statements

(continued)

12. RELATED PARTY TRANSACTIONS

Morgan Stanley Investment Management (ACD) Limited, as Authorised Corporate Director (ACD), is a related party, and acts as a principal in respect of all transactions of shares in the Company. The aggregate monies received through issues and paid on redemptions are disclosed in the Statement of Change in Net Assets Attributable to Shareholders. Any amounts due to or from Morgan Stanley Investment Management (ACD) Limited at the end of the accounting year are disclosed in notes 9 and 11. Amounts payable to Morgan Stanley Investment Management (ACD) Limited in respect of fund administration and

management services are disclosed in note 6, and amounts due at the end of the year in note 11.

The amount of fees waived by the ACD in order to reduce the impact such fees have on the performance of the Fund are disclosed in note 6.

There are no material shareholders (30 September 2014: no material shareholders).

13. CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES

The Fund had no contingent liabilities or capital commitments at the year end date (30 September 2014: £nil).

14. SHAREHOLDERS’ FUNDS

The annual management charges for the Fund are as follows: Class A 1.50%

Class I 0.75%

The net asset value, the net asset value per share and the number of shares are set out in the Performance Record on pages 7 to 8. The distribution per share class is given in the Distribution Tables on page 18.

15. PORTFOLIO TRANSACTION COSTS

Analysis of total trade costs.

Purchases Sales For the year ending 30 Sep 15 30 Sep 14 30 Sep 15 30 Sep 14

Equities 225,450,297 129,395,601 264,739,969 169,365,579 Trades in the year before transaction costs 225,450,297 129,395,601 264,739,969 169,365,579 Commissions Equities 155,443 88,913 (184,278) (132,227) Total Commissions 155,443 88,913 (184,278) (132,227) Taxes Equities 202,574 177,316 (2,129) (1,640) Total Taxes 202,574 177,316 (2,129) (1,640) Total costs 358,017 266,229 (186,407) (133,867) Total net trades in

the year after

transaction costs 225,808,314 129,661,830 264,553,562 169,231,712

In the case of shares, commissions and taxes are paid by the sub-fund on each transaction. In addition, there is a dealing spread between the buying and selling prices of the underlying investments. Unlike shares, other types of investments (such as bonds, money market instruments, derivatives) have no separately identifiable transaction costs; these costs form part of the dealing spread. Dealing spreads vary considerably depending on the transaction value and market sentiment. At the balance sheet date the dealing spread was 1.82% (2014: 1.74%).

Total transaction cost expressed as a percentage of asset types:

Purchases Sales For the year ending 30 Sep 15 30 Sep 14 30 Sep 15 30 Sep 14

% % % %

Commissions

Equities 0.069 0.069 (0.070) (0.078)

Taxes

Equities 0.090 0.137 (0.001) (0.001)

Total transaction cost expressed as a percentage of average NAV:

For the year ending 30 Sep 15 30 Sep 14

% %

Commissions 0.054 0.038

Taxes 0.032 0.031

(18)

Notes to the Financial Statements

(continued)

16. SHARE RECONCILIATION

Reconciliation of the share movements in the year 30 Sep 2015 A Accumulation A Income I Accumulation I Income

Opening shares in issue 165,989 25,847 9,574,923 8,759,240 Creations during the year 10 128 1,831,553 1,136,695 Cancellations during the year (67,083) (18,606) (2,048,809) (2,829,031)

Closing shares in issue 98,916 7,369 9,357,667 7,066,904

17. FAIR VALUE HIERARCHY

Valuation technique Assets Liabilities Assets Liabilities 30 Sep 2015 30 Sep 2015 30 Sep 2014 30 Sep 2014

Quoted prices for identical instruments

in active markets^ 574,730,241 – 575,757,577 – Prices of recent

transactions for identical

instruments – – – – Valuation techniques using observable market data^^ – – – – Valuation techniques using non-observable data – – – – 574,730,241 – 575,757,57 –

^ Fair value based on a quoted price for an identical instrument in an active market. ^^ Fair value based on a valuation technique using observable market data and will

generally include evaluated pricing techniques using inputs such as quoted prices for similar instruments, interest rates, yield curves and credit spreads.

18. POST BALANCE SHEET EVENT

(19)

Distribution Tables

FOR THE YEAR ENDED 30 SEPTEMBER 2015 INTERIM DISTRIBUTION IN PENCE PER SHARE

Group 1: shares purchased prior to 1 October 2014

Group 2: shares purchased on or after 1 October 2014 to 31 March 2015

Distribution Distribution

Net paid paid

Income Equalisation 31 May 2015 31 May 2014

(p) (p) (p) (p)

Share Class A – Accumulation

Group 1 1.2689 – 1.2689 10.1934

Group 2 1.2689 0.0000 1.2689 10.1934

Share Class A – Income

Group 1 0.6514 – 0.6514 2.4043

Group 2 0.6514 0.0000 0.6514 2.4043

Share Class I – Accumulation

Group 1 21.5292 – 21.5292 28.4812

Group 2 14.5091 7.0201 21.5292 28.4812

Share Class I – Income

Group 1 6.4678 – 6.4678 8.6061

Group 2 4.7681 1.6997 6.4678 8.6061

FINAL DISTRIBUTION IN PENCE PER SHARE

Group 1: shares purchased prior to 1 April 2015

Group 2: shares purchased on or after 1 April 2015 to 30 September 2015

Distribution Distribution

Net payable paid

Income Equalisation 30 Nov 2015 30 Nov 2014

(p) (p) (p) (p)

Share Class A – Accumulation

Group 1 25.2509 – 25.2509 28.9633

Group 2 25.2509 0.0000 25.2509 28.9633

Share Class A – Income

Group 1 7.6414 – 7.6414 8.9069

Group 2 1.4876 6.1538 7.6414 8.9069

Share Class I – Accumulation

Group 1 47.7106 – 47.7106 49.0117

Group 2 15.5353 32.1753 47.7106 49.0117

Share Class I – Income

Group 1 14.0980 – 14.0980 14.7073

Group 2 5.3778 8.7202 14.0980 14.7073

EQUALISATION

Equalisation applies only to shares purchased during the distribution period (Group 2 shares). It is the average amount of income included in the purchase price of all Group 2 shares and is refunded to holders of these shares as a return of capital.

(20)

Fund Review

INVESTMENT OBJECTIVE

The objective of the Fund is to provide an attractive rate of return through investment primarily in sterling corporate and other sterling non-gilt fixed interest securities. A proportion of the Fund may also invest in non-sterling fixed interest securities as well as UK Gilts.

RISK AND REWARD PROFILE

Lower risk Higher risk

Potentially lower rewards Potentially higher rewards

The risk and reward category shown is based on historic data. • Historic figures are only a guide and may not be a reliable

indicator of what may happen in the future. • As such this category may change in the future.

• The higher the category, the greater the potential reward, but also the greater the risk of losing the investment. Category 1 does not indicate a risk free investment.

• The Fund is in this category because it invests in fixed income securities and the Fund’s simulated and/or realised return has experienced medium rises and falls historically.

This rating does not take into account other risk factors which should be considered before investing, these include:

• Your investment can go down as well as up. You may not get back the amount you have invested.

• The value of bonds are likely to decrease if interest rates rise and vice versa.

• Issuers may not be able to repay their debts, if this happens the value of your investments will decrease. This risk is higher where the Fund invests in a bond with a low credit rating. Investors may be compensated for this with higher interest payments.

PERFORMANCE RECORD AS AT 30 SEPTEMBER 2015

Share Class A Accumulation 30 Sep 30 Sep 30 Sep

Retained distributions on accumulations shares (0.43) (0.50) (0.53)

After direct transaction costs of: – – –

Performance (i)

Prices

Share Class A Income 30 Sep 30 Sep 30 Sep

Retained distributions on accumulations shares – – –

Performance (i)

Closing net asset value 600,214 836,834 770,512 Closing number of shares 41,519 58,475 56,434

Prices

(21)

Fund Review (continued)

Share Class I Accumulation 30 Sep 30 Sep 30 Sep

Retained distributions on accumulations shares (0.57) (0.62) (0.66)

Performance (i)

Closing net asset value 32,967,599 1,350,128 4,109,617 Closing number of shares 1,435,109 60,838 199,794

Prices

Share Class I Income 30 Sep 30 Sep 30 Sep

Retained distributions on accumulations shares – – –

Performance (i)

Prices

Share Class F Accumulation* 30 Sep 30 Sep

2015 2014 Change in net assets per share (iii) (p) (p)

Opening net asset value per share 1.03 1.00

Return before operating charges 0.04 0.03

Operating charges – –

Return after operating charges 0.04 0.03

Distributions on income units – –

Closing net asset value per share 1.07 1.03

Retained distributions on accumulations shares (0.03) (0.02)

After direct transaction costs of: – –

Performance (i)

Return after operating charges 3.64% 3.35%

Closing net asset value 25,922,007 8,704,834 Closing number of shares 24,202,002 8,422,922

Operating Charges (ii) 0.22% 0.22%

Direct transaction costs 0.00% 0.00%

Prices

Highest share price 1.11 1.04

Lowest share price 1.06 0.97

* Launched 3 March 2014.

Share Class F Income** 30 Sep 30 Sep

2015 2014 Change in net assets per share (iii) (p) (p)

Opening net asset value per share 1.02 1.00

Return before operating charge 0.04 0.04

Operating charges – –

Return after operating charges 0.04 0.04

Distributions on income units (0.03) (0.02)

Closing net asset value per share 1.03 1.02

Retained distributions on accumulations shares – –

After direct transaction costs of: – –

Performance (i)

Return after operating charges 3.65% 3.52%

Closing net asset value 60,278,459 32,039,032 Closing number of shares 58,634,836 31,479,168

Operating Charges (ii) 0.22% 0.22%

Direct transaction costs 0.00% 0.00%

Prices

Highest share price 1.09 1.03

Lowest share price 1.03 0.97

** Launched 4 March 2014.

(i) The performance has been calculated in accordance with the Statement of Recommended Practices’ prescribed calculation methodology. This is for financial statement reporting purposes only and may differ from the Fund’s performance disclosed on the Key Investors document or the Fund’s prospectus. Past performance is no guarantee of future returns. In particular, any return illustrated here will not necessarily continue at the levels shown.

(ii) Operating charges show the annual expenses of the Fund as a percentage of the average net asset value.

(iii) Valued at bid basis.

(22)

Fund Review (continued)

PERFORMANCE REVIEW

For the 12-month period ending 30 September 2015, the Fund’s I Accumulation class shares underperformed the benchmark, Bank of America-Merrill Lynch Sterling Non-Gilt All Stocks Index by 1.06%), returning 3.51% (i) (net of fees in sterling) versus 4.57% for the Index.

The underperformance of the Fund was mainly due to the underweight to duration which averaged 1.25 years over the period. During the period, five-year Gilts fell 52bps and ten-year Gilt yields fell 61bps. This explains the bulk of the strong absolute return, and the relative underperformance. The Fund continues to be underweight to duration, viewing the risks posed by Gilt yields to be as low as to be asymmetric, while the underweight acts as a counterbalance to owning credit. It should also be noted that the Index has been gradually extending its duration as companies can borrow longer-term money at low yields. The Fund is positioned to be underweight credit in spread duration terms, but is overweight some of the higher beta sectors. Sterling credit spreads were wider over the period, with most of the widening witnessed in the last quarter as concerns over global growth surfaced. The overall impact of credit positioning was a small positive.

MARKET REVIEW

Over the last twelve months, the Bank of England (BoE) kept policy rates unchanged, with this decision supported by inflation reaching zero, a deceleration in growth and no rate rises from the Federal Reserve. Gilts rallied, with yields pushed lower across the curve. UK employment growth continues to be robust, with some signs of a pickup in wage growth. We have seen additional stimulus from several major central banks, such as the

implementation of Quantitative Easing (QE) from the European Central Bank (ECB) being the most significant for this portfolio. Despite accommodative central bank policy, credit market spreads were broadly wider during the period as a whole. Leading up to the commencement of the ECB’s QE programme, and shortly after, spreads tightened as the portfolio rebalancing effect took place. Since then, heavy supply, as companies took advantage of very low yields and issued more longer dated bonds, as well as concerns over Chinese global growth, have weighed on the market.

PORTFOLIO ACTIVITY

The Fund has remained active throughout the period, participating in new issues and actively rotating existing issues. During the period, the Fund increased its overweight to Financials. Most of the increase in exposure came via Insurance bonds. The Fund has increased its underweight to Industrials, due to increasing M&A risk, and reduced its underweight to Utilities

underweight to government related securities, securitised and covered bonds, driven by limited spread pick-up and the existence of more attractive investment opportunities in other segments of the credit market. Exposure to corporate hybrids was also increased during the period.

STRATEGY & OUTLOOK

We believe that the BoE will not raise rates before the Federal Reserve and with the market pricing in the first rate rise in November 2016, we believe duration in the sterling markets will remain range-bound. The ECB is also likely to remain

accommodative, which should give some support to credit and risk assets in general. We continue to see opportunities in sterling credit providing we do not enter in to a recession. While economic data in the UK remains relatively strong (GDP, wage growth); global factors such as the extent of the slowdown in China and subsequent volatility will be important. We believe that the management of a period of low liquidity within credit markets will be a major driver of returns for the Fund. The Financial sector is still going through a secular de-risking driven by regulators and policymakers, which will be beneficial for bondholders. In contrast, we are not positive on industrials where we see management strategy focused on increasing shareholder value, creating M&A risk. We believe that defaults will remain low in the High Yield segment of the market, and there are pockets of value available.

All information is provided for informational purposes only and should not be deemed as a recommendation to purchase or sell the securities mentioned.

(23)

Portfolio Statement

Nominal in Market % of net % of net

GBP Value asset value asset value

unless stated Investments (£) 30 Sep 2015 30 Sep 2014

Corporate Bonds – 75.80% 500,000 Abbey National 1.875% 2020 487,620 0.39 300,000 Abbey National 3.875% 2029 311,229 0.25 550,000 ABN AMRO 2.5% 2018 558,371 0.44 200,000 ABP Finance 6.25% 2026 248,038 0.20 200,000 Aegon 6.125% 2031 252,740 0.20

300,000 Affinity Water Finance 5.875% 2026 375,291 0.30 450,000 Affordable Housing Finance 3.8% 2044 527,809 0.42

300,000 Altice Financing 6.5% 2022 230,759 0.18

350,000 Amgen 4% 2029 359,488 0.29

250,000 Anglian Water Osprey Financing 5% 2023 246,582 0.20 150,000 Anglian Water Services Financing 4.5% 2026 161,580 0.13 400,000 Anglian Water Services Financing 6.875% 2023 513,144 0.41

200,000 Anheuser-Busch 6.5% 2017 214,942 0.17 600,000 Apple 3.6% 2042 580,146 0.46 500,000 APT Pipelines 4.25% 2024 518,210 0.41 100,000 Areva 3.5% 2021 69,224 0.06 350,000 Areva 4.875% 2024 245,991 0.20 100,000 Arqiva Financing 5.34% 2037 111,589 0.09 590,000 ASR 5.125% 2045 410,869 0.33 300,000 Aviva 5.125% 2050 277,137 0.22 250,000 Aviva 6.125% 2036 263,053 0.21 600,000 AXA 7.125% 2020 696,390 0.55

600,000 Bank Nederlandse Gemeenten 0.875% 2016 599,136 0.48

150,000 Bank of America 4.25% 2026 161,952 0.13

1,000,000 Bank of America 5.25% 2016 1,034,490 0.82

250,000 Bank of America 5.5% 2021 276,592 0.22

300,000 BASF 1.375% 2017 300,618 0.24

400,000 BAT International Finance 6% 2022 476,904 0.38

50,000 BAT International Finance 6% 2034 63,584 0.05

200,000 Bayer 3.375% 2024 131,930 0.10 700,000 Bayer 3.75% 2074 503,681 0.40 350,000 BHP Billiton Finance 3.25% 2024 344,634 0.27 200,000 BMW Finance 3.375% 2018 204,318 0.16 50,000 BNP Paribas 3.5% 2016 51,145 0.04 1,000,000 BNP Paribas 5.75% 2022 1,107,690 0.88 800,000 BPCE 5.25% 2029 838,136 0.67 100,000 BUPA Finance 3.375% 2021 102,170 0.08 500,000 BUPA Finance 5% 2023 510,500 0.41

150,000 Cambridgeshire Housing Capital 4.25% 2045 155,557 0.12 50,000 Canary Wharf Finance II 5.952% 2037 62,039 0.05

450,000 Centrica 5.25% 2075 430,029 0.34

150,000 Cie de Financement Foncier 5.5% 2027 189,500 0.15

300,000 Cie de Saint-Gobain 5.625% 2016 313,680 0.25

225,000 Circle Anglia Social Housing 5.2% 2044 268,681 0.21

1,000,000 Citigroup 5.15% 2026 1,155,590 0.92

150,000 Citigroup 7.375% 2039 224,512 0.18

1,000,000 CNP Assurances 7.375% 2041 1,104,910 0.88

900,000 Comcast 5.5% 2029 1,096,794 0.87

1,000,000 Commonwealth Bank of Australia 2% 2027 671,705 0.53 200,000 Commonwealth Bank of Australia 2.25% 2018 202,996 0.16 250,000 Commonwealth Bank of Australia 3% 2026 258,392 0.21 300,000 Commonwealth Bank of Australia 4.875% 2023 318,138 0.25

200,000 Compass 3.85% 2026 214,598 0.17

100,000 Constellium 4.625% 2021 62,340 0.05

200,000 Constellium 7% 2023 129,435 0.10

1,000,000 Cooperatieve Centrale Raiffeisen-Boerenleenbank 5.25% 2027 1,078,660 0.86 350,000 Cooperatieve Centrale Raiffeisen-Boerenleenbank 2.25% 2022 341,694 0.27 200,000 Coventry Building Society 5.875% 2022 237,876 0.19

600,000 CPUK Finance 2.666% 2042 598,068 0.48

500,000 Credit Agricole 7.375% 2023 618,450 0.49

100,000 Credit Suisse Finance 7% 2020 116,854 0.09

350,000 Credit Suisse Funding 3% 2022 343,994 0.27

350,000 Daimler 1.25% 2017 342,373 0.27 100,000 Daimler 1.375% 2015 99,965 0.08 400,000 Daimler 1.625% 2016 399,200 0.32 250,000 Daimler 2.375% 2018 248,765 0.20 350,000 Debenhams 5.25% 2021 342,044 0.27 275,000 Deutsche Boerse 2.75% 2041 201,373 0.16 260,000 Deutsche Telekom 7.625% 2030 366,163 0.29

400,000 Dexia Credit Local 2.125% 2025 388,220 0.31

150,000 East Japan Railway 4.5% 2036 171,762 0.14